US Labor Market: Too Resilient for Rate Cuts

By datatrekresearch in Blog

DataTrek co-founder Jessica Rabe takes a deep dive into the current state of the US labor market in our latest YouTube Video, given that it is a critical driver of future Federal Reserve monetary policy, domestic economic growth, and corporate profits. She uses some unconventional and more detailed metrics, from Google Trends to Quits and Job Openings data, as they explain what’s driving the headline jobs numbers.

Watch it here, and please hit the like and subscribe button if you enjoy the video!

Transcript:

Hi, DataTrek co-founder Jessica Rabe here, and today's video is on the current state of the US labor market, a critical driver of future Federal Reserve monetary policy, domestic economic growth, and corporate profits. The strength of the American labor market has been a consistent tell in term of the Fed’s rate decisions throughout the latest tightening cycle, and it continues to shrug off high interest rates even now.   That’s important, because it is hard to see inflation getting to the Fed’s 2% target with demand for labor still so strong.  The FOMC knows this all too well, which is why so many Fed speakers talk about interest rates remaining higher for longer. 

Now, while we look at traditional labor market datasets, we also regularly review both unconventional and more detailed metrics because many are real time indicators that explain what’s driving the headline jobs numbers. With that, I’m going to briefly go over a few charts that capture the current state of the US labor market.

Let’s start by looking at 3 charts from Google Trends that address labor market strength and ongoing Pandemic Era trends, such as work from home, wage pressures and excessive quit rates. Google Trends simply counts how many times users query specific search terms.  By looking at the time series of this data, we can evaluate whether their popularity is rising, falling, or staying constant. We know many people question the accuracy of the official jobs data, and that is an entirely valid concern. Google Trends is a great reality check, which is why we use the tool so much in our work. 

First, here is a chart that shows US Google search volumes for “ask for a raise” over the last 5 years, as well as the year over year change in average hourly earnings.

US Google searches for “ask for a raise” peaked in June 2022, shortly after average hourly earnings hit a post-pandemic high in March 2022, +5.9 pct y/y. As American workers have lost confidence in their ability to demand higher pay, with Google searches down 7 pct in 2023 YTD versus 2022, average hourly earnings have also fallen steadily, now up 4.1 pct y/y in October.

However, search interest in “ask for a raise” is still up 36 pct versus pre-Pandemic 2019 and, as a result, average hourly earnings growth still exceeds pre-pandemic levels of just 3.3 percent annual growth in 2019. The good news is that both metrics are coming down from last year’s structurally high levels, but the Fed will want to keep cooling the US economy with “higher for longer” interest rates.  That message is meant to put pressure on the US economy and diminish workers’ confidence that they can negotiate higher wages. 

Second, here are US Google search volumes for “remote work” over the last 5 years. There’s also a chart that shows US office occupancy back to 2020, with the data from Kastle Systems, a leading provider of office security hardware and software.

Searches for “remote work” remain at structurally high levels and just hit a 5-year high 3 months ago. Americans continue to feel secure enough in their current or future employment to push for at least some remote work. This is also reflected by still low US office occupancy, which remains at just 50 pct even almost 4 years after lockdowns. To put this in perspective, office occupancy was above 95 pct before Q1 2020’s lockdowns.

Now even the Fed’s latest Beige Book mentioned that businesses are partly mitigating higher labor costs by allowing remote work in lieu of higher pay. As much as wage growth continues to fall, the real “tell” about the trajectory of the US economy likely lies in American workers’ return to the office. If a recession is truly close, we should see office occupancy turn meaningfully higher as employees trade remote work for job security.  But, as the latest Kastle Systems data shows, we’re simply not there yet. 

Next, our last Google Trends chart shows US Google search volumes for “leave job” over the last 5 years. I also put up a chart of our “Take this job and shove it indicator”, which is the ratio of quits to total separations from the monthly JOLTS report. It came in at 66 pct in September 2023 – the latest available data – which is still well above pre-pandemic levels. For example, it was 60.4 pct in February 2020. Both these charts show American workers are still too confident in the US economy and their ability to find better job opportunities than the Fed would like to see after their recent, very aggressive rate hikes. 

Now here’s why that’s a problem. Here is a chart that shows the 3-month moving average of median wage growth overall, as well as for job switchers and stayers.

• Wage growth for job switchers was up 5.6 pct year over year in October. That’s down from the record high of 8.5 pct in July 2022, but still far higher than growth of 4.5 pct in February 2020. Wage growth for job switchers is therefore skewing overall wage growth higher, which is currently up 5.2 pct y/y.
  
• Meanwhile, wage growth for job stayers was up 4.8 pct in October, still much higher than 3.2 pct in February 2020 but at least somewhat of a drag on overall wage growth.

So, the bottom line here is that wage growth for job switchers and job stayers still far exceeds pre-pandemic levels. Yes, they are at least falling relatively quickly, but it’s important that this downward momentum continues. The late 1990s/early 2000s experience shows wage growth could remain elevated above 5 pct for job switchers and 4 pct for job stayers for years.This sort of growth is possible now, given that there are still 1.5x the number of job openings as there are unemployed workers, whereas there were more unemployed workers than job openings in the early 2000s. In Chair Powell’s last FOMC press conference, he said that he sees the historically large difference between openings and unemployed workers as potentially playing an even larger role when it comes to possibly pressuring wages and therefore overall inflation going forward.

So overall, our 3 Google Trends charts and supplemental job and wage growth data show the Fed’s aggressive tightening cycle has had little impact on American workers’ psychology in terms of how they navigate the US labor market.

To finish up today’s video, let’s look at last Thursday’s US initial and continuing claims for unemployment insurance because they took an unexpected turn lower after trending higher in recent weeks.

First, here is a chart that shows weekly Initial Claims from the start of 2022 to today. After 3 weeks of average or slightly above average readings, the most recent result of 209,000 this past Thursday fell back below the 2022 to present mean of 220,000. This year’s peak claims were in June at between 262 to 265,000 a week, so Thursday’s reading was 21 percent below those highs.

In addition to the lower than expected Initial Claims number, Continuing Claims declined sequentially, the first time since September. Since September, ongoing claims had been rising and even surpassed the April 2023 highs 2 weeks ago. This past week they fell by 22,000 to 1.8 million. And that cannot be explained by seasonal adjustment factors. For example, here is a chart that shows the year over year percentage increase in Continuing Claims dropped to 23 percent last week from its band of 24 to 30 percent since May 2023.

The bottom line here is that while demand for labor looked like it was starting to finally roll over for a few weeks recently, this past week showed the US labor market remains quite resilient. With much of the current rally predicated on lower policy rates next year, the continued robust labor market shows this assumption is far from a lock. We’re still bullish on US equities the rest of this year, but we’ll continue to review both traditional and nontraditional labor market datasets in conjunction with Fed Funds Futures in our DataTrek Morning Briefings to stay on top of these trends and make sure our readers remain ahead of the curve.

So that's our current take on the US labor market: there is has been some weakening, but both the official data and Google Trends search volumes show it remains surprisingly strong. On the plus side, that means corporate profits should have a nice tailwind in Q4 and Q1.  On the downside, markets may have to reassess their assumption that rate cuts are just a few months away. 

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Thanks again for watching and we hope you have a great day!